Monday, January 9, 2012

Small Business Research Paper

How Small Businesses Compete Research Paper

The present decade is marked with a well-defined globalization trend that fosters the development of large multinational and global corporations that build strong brands and win customer loyalty. At the first glance, the small business sector is left behind due to the superpower of large companies and has no chances to withstand the fierce competition in the market. On the other hand, large size implies many disadvantages that consequently make up a small business’ competitive advantage. In other words, small businesses have more flexibility to adjust to the changing environment and customer tastes than large companies that own large capacities and other assets and resources, which are difficult to control and change within short timeframes. Concerning the nature of small business itself, it is vital to not only to control resource base, but also to keep to the right strategy such as differentiation or low cost, develop wise strategic investment objectives, pricing policies, and competitive signaling (Allan, T., Globalization and its Features ). Moreover, the emerging opportunities presented by e-businesses enhance the competitive capabilities of small firms and open the ways to explore new market trends and changing consumer preferences.

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Major factor that proves that small businesses can retain competitive advantage even in the tough economic conditions can be found in the Porter’s generic strategies. The focused differentiation strategy says that sometimes it is better to focus one’s attention on a small group of customers. 

Michael Porter defined differentiation as “providing something unique that is valuable to the buyer beyond simply offering a low price” (Shue, V. and Stanley, T). He provided that differentiation can be tangible and intangible, and both types create customer value. Tangible differentiation includes such characteristics of goods as performance, size, colors, materials, packaging, and other features of augmented product, including warranties, post sales service, etc. (Shue, V. and Stanley, T). 

Intangible differentiation is often difficult to observe because of certain subjectivity; different people have different perceptions of product and company identity or image. This kind of differentiation, thus, is often built on the company’s image or product’s status (e.g. exclusive, luxurious). These inputs trigger customer responsiveness, which does not depend on solely products, but also customer-supplier relationships as whole (Terry, Michael. Small Business and its Advantages). This enables small business owners to select a distinct group of customers on the basis of their needs, wants, and preferences, and pursue their satisfaction with reinforced effort. The customers within a selected segment should have a strong reason/desire to purchase company’s products, be easy to reach, big enough to result in the necessary sales volume, and simultaneously, small enough for a company’s competitors to overlook the segment. Competitive advantage, thus, lies in the right choice of target audience and the right strategy to reach the company’s prospects. 

While differentiation is concerned with how to compete in a given market, segmentation defines where to compete. Market segmentation gives the possibility to find the right market niche (Galbrait, John Kenneth). Usually, the best possible way to conduct segmentation process is compiling a database of existing clients and dividing them into separate independent groups according to their special interests, needs, wants, and preferences. To achieve high organizational performance standards, the customer segments should be well-defined and specifically described so that managers could develop specific objectives. The research conducted among 600 small retail businesses showed that those businesses characterized by well-developed marketing and overall performance objectives achieved higher performance results than those companies whose objectives were defined unclearly and lacked specifics. Another study that was conducted a year later among 600 apparel retail stores revealed the fact that small companies, where owners and executive management demonstrated high entrepreneurial orientation (ability to take risks, introduce innovations, and take advantage of newly emerging opportunities), showed better operational results, and thus, larger financial inflows (Shue, V. and Stanley, T). 

However, taking a more fundamental approach to research the sources of competitive advantage of small business, it is worth to consider the resource-based view. Theoretically, it is defined as continuously developing existing resources and capabilities and, at the same time, creating the new ones to adequately respond to the fast moving market environment (Allan, T.,Globalization and its Features). Capabilities, in their turn, are classified into distinctive capabilities and the reproducible ones. While reproducible capabilities (financial and technical, explicit knowledge) can be relatively easily bought or copied, distinctive organizational capabilities represent unique features of a company and include effective teamwork, advanced leadership, expertise, or specific patents and licenses. It is imperative that the combination of these two types of organizational capabilities should produce the effect of synergy. In other words, RBV provides that the company’s strategy should be build in regards to its resource pool so that to best utilize its capabilities and core competencies to take advantage of the opportunities presented by the external environment. The sustainable competitive advantage is achieved by assembling the appropriate combination of resources, exploiting them in the most effective way, developing and creating new resources to adequately respond to changes in turbulent marketing environment (Diversification with time-varying risk).
Porter developed 5 major sources of competitive advantage. The first one is represented by unique competitive position. Although, given the conditions of intensive competition, the unique competitive position is hard to achieve and even much more difficult to retain, a company should define several capabilities that makes it different from other market participants (Emalson, Steffany. Global Marketing Environment). The second source of competitive advantage lies in distinct tradeoffs and wise choices in relation to competition. Third, Porter emphasizes the importance of a company’s activities: each step should be made according to the company’s overall business strategy. The fourth factor suggests that all activities should be viewed as a system, not separate parts. Finally, the fifth source of competitive advantage is maintaining high operational effectiveness, which means minimization of costs and profit margin increase. These basic factors have become universal and can be applicable to any business. 

In 1997, McGee and Finney conducted a research with the purpose to empirically describe the sources of competitive advantage in the small retail business in rural areas. As a result, 5 critical factors were outlined: 1) quality image, 2) effective differentiation, 3) effectiveness of key merchandising practices, 4) civic involvement, and 5) control of retail program (Galbrait, John Kenneth). Like, in each industry, consumers are seeking high quality and value when making buying decisions. Differentiation gives additional value to the product and makes a product more competitive. The fifth factor indicates that control is also essential in achieving organizational success.

Many experts also agree that it is impossible to underestimate the human factor. Numerous studies indicate that customer-based focus remains a key competitive advantage of small businesses. Many customers admit that while shopping in large retail stores like Wal-Mart, Metro C&C, etc., saves money, small retail stores have larger propensity to provide high quality service. Business press contains negative responses about large retail companies justifying their opinion by the saying that “backlash against huge, impersonal discount stores in which low prices usually come at the expense of good service” (Terry, Michael. Small Business and its Advantages). Many small retail businesses like bookstores or woman apparel retail outlets provide additional value through enhanced strategy of personalization which customers are looking for and willing to pay for, even if the prices are higher than those at the malls. Some people are willing to pay up to 50% premium for quality service that involves human interaction. 

A good example can be found in banking business. Recently large banks realized the benefits of outsourcing to rural banks as a new way of cost-cutting scheme and better customer service. Highly automated systems and call centers cannot serve as a substitute to personalized service that is a priority for small banks. Walking in to the local branch and enjoying friendly attitude of bank workers create an additional value for rural areas. The customers, thus, receive the possibility to take advantage of lower costs of better quality and range of financial services. For instance, Byron Bay bank has already grasped this opportunity along with many other financial services providers who plan to expand their operation activities all across the rural territory of Australia (Gregson B. Stanley). Managers agree that rural outsourcing provides a better flexibility of resource allocation that means encompassing the right target markets and cost reduction. Professionals advise niche/boutique banking as a useful tool for concentration on the bankers’ core competencies and better serve their chosen segment, which gives such competitive advantage as better customer service and skill improvement in the central areas of operation. Full service wide scale strategy, on the other hand, provides a broad cover of customer segments and allows the banks to construct full-cycle solutions. Thus, financial providers of a wide range of services gain greater customer base (Gregson B. Stanley). 

As it was mentioned earlier, it is also essential to maintain a high level of control due to the relatively high cost of programs implementation. Professionals also stress the importance of evaluation of pricing and costs policies supporting their opinion by the data obtained from recent studies. First of all, this concerns the market analysis: strength, weaknesses, opportunities, and threats. Strength and weaknesses concern the company’s inner capabilities that are to be utilized for dealing with threats and grasping opportunities (Terry, Michael. Small Business and its Advantages). Threats and opportunities represent an outside environment, including economic and political situation, suppliers, mediators, technological advances, and finally competition, which small businesses have to constantly monitor.

One of the most promising opportunities is Internet and e-business. The World Wide Web offers multiple options of interaction with customers, suppliers, and third parties. This kind of communications has the potential to significantly decrease the operational costs, including the savings on international calls, business trips, overhead, and human resources, which offers an effective resolution for limited capital base problem. Moreover, this offers possibility to enhance marketing practices as advertising costs can be substantially reduced without negative implications in terms of efficiency. Besides advertising, the World Wide Web enables the companies to simultaneously perform market targeting by choosing the place to put the advertisement. Much money can be saved by conducting an analysis that would help identify the web sites that the target audience usually visits. With the help of the results obtained managers can shoot right in the target. Moreover, the latest researches show that the best decision in the context of customer-oriented approach utilized by small businesses would be the application of the pull strategy. This implies that customers are tired of spam messages (while some may call this an aggressive advertising, the majority of experts have agreed that such strategy is doomed to failure) and reject any intervention in their web space (Terry, Michael. Small Business and its Advantages).

Also, the web site should contain free valuable information for customers such as researches, pieces of advice, and knowledge sharing. This will contribute to building the company’s goodwill and create trustworthy relationships with customers (Terry, Michael. Small Business and its Advantages). Instead, the prospects are likely to search the web in case they need something. Therefore, the competitive advantage is to maintain an up-to-date and perfectly structured web site, where the prospective customers could find a set of comprehensive information about the company and its services, including all the competitive advantages and benefits it can offer. Along with the web site maintenance, the companies can simultaneously push its products and services with the help of subscription letters that will contain not only information on sports, weather, or business, but also this kind of advertising (Terry, Michael. Small Business and its Advantages). In this way, a company can gather valuable information and build positive base for developing customer loyalty. Also, one should not underestimate the civic involvement and public relations. With limited resources, companies can achieve significant sales increase because of a well-planned public relations campaign aimed at improving the firm’s image in the customer’s eyes. This is a tool for communicating business’ benefits and the value it can create for its customers by means of media, public activities, etc. (De Santis, Giorgio and Gerard, Bruno).

Thus, it can be concluded, that in small businesses compete using a wide range of competitive advantages. The benefits were explored in retail and banking field of business. First of all, for each company, it is essential to develop and integrate a strategy that would make it different from its competitors. Differentiation serves as powerful tool for creating additional value to the customer and enables the firm to charge premium prices for this value. Speaking in terms of small businesses activity, the customer-focused strategy was defined as being the major competitive advantage. While large corporations actively utilize economies of scale, decreasing their costs, and, subsequently, prices, small businesses establish a point of different in the field of premium services. 

However, the resource-based view suggests that sustainable competitive advantage can be achieved by creating a synergy – assembling a company’s resources and capabilities, both distinctive and reproducible in the most effective mode. Also, another source of competitive advantage is strong control and evaluation system that would enable the company to follow its strategy and measure its performance by means of inner and market analysis. Strengths and weaknesses should be carefully analyzed to create the right environment fit: reduces the negative impacts of threats and take advantage of opportunities. For many small businesses innovation has become an essential competitive advantage. Therefore, Internet and e-business was actively utilized by many companies. Many experts consider the web to be am efficient tool for implementing a company’s strategy and fulfilling its objectives at the lower cost. By means of on-line activities, companies can not only gather valuable information about their customers and prospects, but also increase customer loyalty and sales volume.
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